Transaction value threshold – less transactions in scope than one would expect?

In his annual speech at the Studienvereinigung Kartellrecht in Bonn at the end of last year, the president of the German Federal Cartel Office (FCO), Andreas Mundt, emphasized that merger control might be the most interesting and relevant part of the regulator’s ongoing work. A recent decision by the Higher General Court of Düsseldorf supports this idea, though likely not in the way Mr Mundt intended. In this post, I summarize the key takeaways from that decision and explore its potential impact on German merger control, as well as the broader debate on revising merger control thresholds.

In the post-Illumina/Grail era, discussions around “killer acquisitions” and the need for revised merger control thresholds – or even call-in options for regulators – remain among the most debated topics in antitrust. So far, the FCO and its president have generally opposed the idea of granting regulators ex officio review rights regardless of whether the relevant thresholds are met. They argued that legal certainty should prevail: According to their view, clear and predictable thresholds are essential for stakeholders to plan and assess their intended transactions.

Deal size matters…

This perspective may also stem from the introduction of the transaction value threshold in Germany back in 2017. This new rule allowed the FCO to review transactions outside the typical turnover-based thresholds when the transaction value exceeds EUR 400 million and the target has substantial operations in Germany. It was mainly introduced to cover transactions involving innovative target companies in the pharma and tech sectors – companies with high values but relatively low turnover (even though in practice, many deals in other industries also required filings under this threshold). Indeed, the transaction value threshold has enabled the FCO to review several high-profile cases that would have previously fallen outside of its jurisdiction, such as Novartis/MorphoSys, Novo Nordisk/Cardior, and Thermo Fisher/Olink, the last of which eventually entered an in-depth Phase 2 review.

However, the real challenge for practitioners lies in the details: Despite the FCO releasing guidelines on the interpretation of “substantial operations,” it is still not always clear when a target meets this criterion. The FCO acknowledges that in mature markets, a target typically only has substantial operations in Germany if it meets the standard turnover-based thresholds. Thus, for targets with limited business activities in Germany, the key question often becomes whether the target is active in a mature market, in which the turnover adequately reflects its market position.

.…but might be not enough

A recent judgment from the Higher Regional Court (which has so far been accompanied only by a short press release) concerns two acquisitions by Adobe in 2018: The purchase of the software providers Magento (for USD 1.68 billion) and Marketo (for USD 4.75 billion; the similarity of the names of both companies is only coincidental). Both deals were notified in the US, but not in Germany. When the FCO learned of the deals and the fact that the targets marketed their software in Germany, it initiated so-called divestment proceedings, arguing that the transactions were notifiable due to their deal size. In the end, the FCO found no substantial concerns and cleared both transactions (so no divestment needed), but still required Adobe to bear the administrative costs of the FCO. Adobe then appealed the decision to put the costs on Adobe.

The court sided with Adobe, concluding that the deals were not notifiable, meaning Adobe was not required to bear the costs. The ruling was based on two key arguments:

• The court found that both targets were active in mature markets, and their turnover below the national thresholds indicated a lack of substantial operations in Germany. This was supported by the fact that the targets had been active in the German market for more than ten years prior to the transactions.
• Additionally, when considering the overall German presence of the targets – including employees, customer base, and domestic activities – the court concluded that these factors did not point to significant domestic operations.

It is the second time, after Meta/Kustomer, that the Higher Regional Court limits the interpretation of the transaction value threshold and restricts the review powers of the German regulator. More recently, the FCO was also confronted with the difficulties of the substantial domestic activities question when it only confirmed in Phase 2 that a deal was not notifiable at all.

More than a fallback in the future?

While the legal question is complex, the outcome of this court decision seems relatively clear. The transaction value threshold serves as a fallback for reviewing transactions in exceptional situations where the target’s revenues are not a reliable measure of its competitive potential. In established markets, however, transactions that do not meet the traditional thresholds will likely face difficulties in justifying the application of the transaction value threshold. Therefore, it can be assumed that the transaction value threshold will remain most significant in markets where “front-loaded” R&D activities are common and where there is a realistic potential for rapid sales growth.

Regarding the broader issue of merger control reform, the FCO has indicated that reducing the transaction value threshold from EUR 400 million to EUR 300 million could help capture more transactions, and – more importantly- that the need for the target to have substantial operations in Germany should be removed from the thresholds. It will be interesting to see whether this latest decision will influence the ongoing debate on these issues.

Photo by Sebastian Pena Lambarri on Unsplash